Either Gordon Brown is mad or I am. His obsession with bankers has become that of an infatuated teenager. He loves them and loathes them. They taunt and tease him, and he pouts and begs and cries and loses his temper. His body craves them, but each day finds him furiously beating their chests with his fists. They have their way with him and walk away. He should forget them all and go back to his GCSE economics paper.

Brown's recession policy is now to take unlimited sums from Britons' current and future spending and give to bankers, notably the Royal Bank of Scotland once run by his old Glasgow chum, Sir Fred Goodwin. This is daft, since banks naturally use the money for the one thing government should avoid in a recession. They protect their balance sheets by writing off bad debts.

Taxpayers' money is thus withdrawn from the economy and saved - a disaster. The impact of policy is blatantly deflationary. The opposite of Keynesian tax and spend, it is tax and save. Yet every senior politician and economic commentator thinks it the right thing to do. None seems ever to have left a City lunch and wandered down a high street. To them, the economy is about banks. For every word written and spoken about the real economy, a thousand are written about banks. The nation is suffering from mad Treasury disease.

If I were a banker with RBS or Barclays or Lloyds, I would do exactly what they have done. Having made rotten business decisions in the past and now been offered limitless riches to cover them, I would take the money and say thank you. I would want to survive.

Not a day passes without Whitehall officials calling bankers and pleading with them to lend to businessmen, baffled as to why their calls go unheeded. But there is no point in hoping that banks will keep borrowing lines open when the recipients' ability to repay is evaporating. In the absence of buoyant demand, credit is mere bad debt. Banks are about making money, not charity. They lost a fortune lending to unreliable borrowers and have no wish to go there again.

Downing Street clearly does not understand this. I am told its denizens now wander about the office in a daze of impotence. They know only bankers to consult in their hour of need. Neither Brown nor his chancellor, Alistair Darling, has any experience of business or industry. The ministers dealing with the recession - Lord Mandelson, Lord Myners and Lady Vadera - are not even in the House of Commons. Their contact books are thick with City friends, City networks and City jobs awaiting them.

Policy is now suffering acute metaphor fatigue. It is pouring money into buckets with holes, pushing string, throwing kitchen sinks, cleaning pipes. Better is the description of the American former labour secretary, Robert Reich, that it is "socialism for rich bankers and capitalism for everyone else".

Last October Darling gave the banks £37bn of taxpayers' money (and the economy just £12bn of stimulus through VAT relief). That instantly vanished into Icelandic debts, toxic loans, dud mortgages, salaries and fees. Now Darling is giving the same banks another £50bn through subsidy "products" that would do credit to a dodgy derivatives trader.

The British government has taken or borrowed an average of £2,000 from every man woman and child in just three months. This money has been devoted not to resuscitating the demand economy but to propping up de facto bankrupt banks. The gambit might have worked had it been deployed sooner, but the banking system is no longer working in the sense that justifies subsidy, the maintenance of confidence to advance credit. It is a huge piggy bank.

I do not often agree with Labour MPs on economics, but I find it hard to quarrel with the chairman of the Commons Treasury committee, John McFall, who wrote last week in the Guardian that banks were "acting rationally by retaining their capital and curtailing lending". But since this was now "suicide for the economy", the job of lending to hard-pressed businesses should be taken on by a state bank, with no balance sheet to guard. Why not use the Post Office?

What is amiss is not lending but spending, the lack of which is depriving every high street of oxygen. Yet Brown and Darling are still sucking spending power from the economy faster than in Margaret Thatcher's first two years in office, in 1980-1.

The government must turn to Keynes. It should concentrate its attention and money on stimulating demand. Such spending may be laundered through a boost to construction and service jobs, though here the risk is of delayed impact and of merely helping rich potential savers (as in the Olympics).

The fastest way of getting cash into the economy is by giving it to those who spend fastest, by a direct transfusion into every high street business and service. This means putting the limitless sums available to the chancellor into the pockets of those most likely to spend: pensioners, those on benefits, and those with children. That is easily done and requires no pleading with City knights.

Governments can best help small businesses by underpinning their revenues, not their debts - by temporarily waiving VAT, national insurance or corporation tax, or by suspending regulatory impediments to economic activity. As I have proposed before, it could give away cashless vouchers to maintain demand for goods and services and thus keep lower paid workers in business.

Other countries are doing this. Barack Obama is reputed to have a massive demand stimulus in the offing. The German government is giving away car purchase vouchers. It is revived demand that will get banks lending again.

Brown and Darling seem uninterested in such things because their advisers cannot imagine the public being trusted to get Britain out of the recession. They see the public as wanton spendthrifts, ignoring the fact that spendthrifts are what the economy most needs.

London now thinks recession can best be ended by top-down enforced lending. It cannot. It will end when people are encouraged to go out and spend. Sir Montagu Norman, governor of the Bank of England in the depression, later reflected: "We achieved absolutely nothing except that we collected a lot of money from a lot of poor devils and gave it to the four winds." It is astonishing that precisely the same blunder is being repeated, and millions will suffer.